Since the beginning of this year, the US economy has demonstrated resilience amidst significant adjustments to economic policies. Judging by the Federal Reserve's dual mandate of maximum employment and price stability, the labor market remains close to full employment, and while inflation remains slightly above target, it has fallen significantly from its post-pandemic peak. At the same time, the balance of risks appears to be shifting.

In my remarks today, I will first analyze the current economic situation and the short-term outlook for monetary policy. I will then focus on the findings of the Federal Reserve's second public review of its monetary policy framework, which is reflected in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that we are releasing today.

Current Economic Situation and Short-Term Monetary Policy Outlook

When I stood here a year ago, the U.S. economy was at a turning point. Our policy interest rate had been held in the 5.25%-5.5% range for over a year. This restrictive policy stance was crucial to containing inflation and promoting a sustainable balance between aggregate demand and supply. Inflation was already well within our target, and the labor market had cooled from its previous overheating, mitigating upside risks to inflation. Yet, the unemployment rate had risen by nearly 1 percentage point—an increase of this magnitude typically seen only during recessions. Over the next three Federal Open Market Committee (FOMC) meetings, we adjusted our policy stance, laying the foundation for a labor market that has remained balanced near maximum employment over the past year.

This year, the economy faces new challenges: substantial tariffs imposed on major trading partners are reshaping the global trading system; tightened immigration policies have led to a sudden slowdown in labor force growth; and, over the long term, adjustments to tax, spending, and regulatory policies are also likely to have a significant impact on economic growth and productivity. There remains significant uncertainty about how these policies will ultimately be implemented and what their long-term impact on the economy will be.

Changes in trade and immigration policies are affecting both demand and supply. In this environment, it is difficult to distinguish between cyclical and trend (or structural) changes—a crucial distinction, as monetary policy can stabilize cyclical fluctuations but struggles to address structural changes.

The labor market is a prime example. The July employment report released earlier this month showed that nonfarm payroll growth averaged just 35,000 per month over the past three months, well below the 168,000 per month projected for 2024. Due to significant downward revisions to previous data for May and June, the current slowdown in employment growth is more pronounced than anticipated a month ago. However, the slowdown in employment growth does not appear to have led to significant labor market slack (a desirable outcome): while the unemployment rate rose slightly in July, it remained at a historic low of 4.2%, having remained generally stable over the past year. Other labor market indicators have also been largely unchanged or weakened only slightly, including the quit rate, layoff rate, job opening-to-unemployment ratio, and nominal wage growth. The simultaneous slowdown in both labor supply and demand has significantly reduced the critical mass of job gains required to maintain a stable unemployment rate. Indeed, with a sharp decline in immigration, labor force growth has already slowed significantly this year, and the labor force participation rate has also declined slightly in recent months.

Overall, while the labor market appears to be in balance, this equilibrium is peculiar—resulting from a significant slowdown in both labor supply and demand. This unusual situation implies that downside risks to employment are increasing; if these risks materialize, they could quickly manifest themselves in the form of a surge in layoffs and a rise in the unemployment rate.

Meanwhile, GDP growth slowed significantly in the first half of this year, to 1.2%, roughly half the projected 2.5% growth rate for 2024. This slowdown primarily reflects a slowdown in consumer spending. Similar to the labor market, the slowdown in GDP growth likely stems in part from slower supply (or potential output) growth.

As for inflation, tariffs have begun to push up prices in some categories. Estimates based on the latest available data indicate that overall personal consumption expenditures (PCE) prices rose 2.6% in the 12 months ending in July. Excluding the more volatile food and energy components, core PCE prices rose 2.9%, exceeding the same period last year. Core goods prices rose 1.1% over the past 12 months, a significant reversal from the modest decline expected in 2024. In contrast, housing services inflation continued its downward trend, while non-housing services inflation remained slightly above levels historically consistent with the 2% inflation target.

The impact of tariffs on consumer prices is now clearly evident. We expect these effects to continue to accumulate in the coming months, but the timing and magnitude remain highly uncertain. For monetary policy, the key question is: Are these price increases likely to significantly increase the risk of persistent inflation? A reasonable baseline assumption is that the impact of tariffs will be relatively short-lived—a one-time shift in the price level. Of course, "one-time" does not mean "all-in-one": tariff increases still take time to filter through supply chains and distribution networks to end prices, and tariff rates are still evolving, which may prolong the adjustment process.

However, the upward pressure on prices from tariffs could also trigger more persistent inflationary dynamics, a risk that needs to be assessed and managed. One possibility is that rising prices could lead to lower real incomes for workers, prompting them to demand higher wages from their employers, triggering an adverse wage-price spiral. However, given that the current labor market is not particularly tight and downside risks are increasing, this scenario seems unlikely.

Another possibility is that inflation expectations are rising, which in turn is driving actual inflation higher. Although inflation has been above target for four consecutive years and remains a key concern for households and businesses, market and survey-based indicators of longer-term inflation expectations appear to be stable and consistent with our 2% longer-term inflation objective.

Of course, we cannot assume that inflation expectations will remain stable. Whatever happens, we will not allow a one-time increase in the price level to develop into a persistent inflation problem.

Taken together, what does this mean for monetary policy? In the near term, risks to inflation face upside, while risks to employment face downside—a challenging situation. Our framework requires us to balance our dual mandates when they conflict. The policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market indicators allows us to remain cautious when considering adjustments to the policy stance. Nevertheless, given that policy remains within a restrictive range, the baseline outlook and the evolving balance of risks may require adjustments to the policy stance.

There is no preset path for monetary policy. FOMC members will base their decisions entirely on their assessment of the data and its implications for the economic outlook and the balance of risks, and we will not deviate from this principle.

Evolution of the monetary policy framework

I now turn to my second topic: The Federal Reserve's monetary policy framework is based on our statutory mandate given to us by Congress—to promote maximum employment and price stability for the American people. We remain deeply committed to this mandate, and the updated framework will support it across a broad range of economic conditions. Our revised Statement on Longer-Run Goals and Monetary Policy Strategy (the "Consensus Statement") outlines how we pursue our dual mandate objectives. Its purpose is to provide the public with a clear understanding of our monetary policy thinking—an understanding that is essential for transparency and accountability and enhances the effectiveness of monetary policy.

The adjustments to this framework review are a natural evolution, informed by our deepening understanding of the economy. We continue to build on the first consensus statement adopted in 2012 during Chairman Ben Bernanke's tenure. The revised statement released today is the culmination of our second public review of the framework, conducted every five years. This year's review comprises three components: "Fed Listens" events hosted by the Federal Reserve Banks, a flagship research conference, and discussions and deliberations among policymakers at the FOMC meetings, supported by staff analysis.

In conducting this year’s review, a core goal was to ensure that our framework is relevant across a wide range of economic environments; at the same time, it needs to evolve as economic structures change and our understanding of those changes. The challenges faced during the Great Depression, the Great Inflation, and the Great Moderation were different, and the challenges we face today are no different.⁶

When we last reviewed our framework, we were in the "new normal": interest rates near the effective lower bound (ELB), accompanied by low growth, low inflation, and a very flat Phillips curve (meaning inflation was extremely insensitive to economic slack). To me, the statistic that epitomizes that era is the fact that, following the outbreak of the Global Financial Crisis (GFC) in late 2008, our policy rate remained at the ELB for seven years. Many of you will recall the weak growth and slow recovery of that era—the prevailing view was that even a mild recession would result in a rapid return to the ELB and possible prolonged stay there. If the economy weakened, inflation and inflation expectations would likely decline, and with nominal interest rates anchored near zero, real interest rates would rise accordingly. Higher real interest rates would further suppress employment growth, exacerbating downward pressure on inflation and inflation expectations, triggering a vicious cycle.

The economic environment that pushed the policy rate toward the ELB and prompted the 2020 framework adjustments was viewed as driven by slow-moving global factors that could have persisted for a long time—but for the pandemic.⁸ The 2020 Consensus Statement included several elements addressing risks associated with the ELB, which have become increasingly prominent over the past two decades: We emphasized the importance of anchoring long-term inflation expectations for achieving price stability and full employment; and drawing on the extensive literature on strategies to mitigate ELB risks, we adopted "flexible average inflation targeting"—a "make-up" strategy to ensure that inflation expectations remained anchored even under the ELB constraint.⁹ Specifically, we stated that if inflation persisted below 2%, appropriate monetary policy could potentially push inflation moderately above 2% for some time.

However, the post-pandemic economic reopening did not lead to low inflation and the ELB dilemma. Instead, it left the global economy facing its highest inflation in four decades. Like most other central bankers and private sector analysts, until the end of 2021, we believed that inflation would decline relatively quickly without requiring significant policy tightening. When it became clear otherwise, we responded forcefully: raising the policy rate by 5.25 percentage points over 16 months. This action, combined with the easing of supply chain disruptions during the pandemic, pushed inflation significantly closer to target without the sharp rise in unemployment that has traditionally accompanied attempts to curb high inflation.

Core content of the revised consensus statement

This year's review considers the evolution of economic conditions over the past five years. During this period, we have observed that inflation can evolve rapidly in response to major shocks, and that interest rates are currently significantly higher than they were during the period from the global financial crisis to the pandemic. Inflation is currently above target, and policy rates are in a restrictive (in my view, mildly restrictive) range. While we cannot be certain where long-term interest rates will ultimately settle, the neutral rate is likely higher than it was in the 1910s—reflecting changes in productivity, demographics, fiscal policy, and other factors affecting the balance between saving and investment. During the review, we discussed how the 2020 statement's focus on the ELB complicated our communication on addressing high inflation. We concluded that overemphasizing a particular economic environment could lead to confusion, and we made several important adjustments to the consensus statement to reflect this recognition.

First, we removed the reference to "the ELB is a defining feature of the economic landscape" and instead stated, "Our monetary policy strategy is designed to foster maximum employment and price stability across a wide range of economic conditions." While the difficulty of operating near the ELB remains a potential concern, it is no longer our core focus. The revised statement reiterates the Committee's readiness to use its full range of policy tools to achieve its maximum employment and price stability goals, particularly when the federal funds rate is constrained by the ELB.

Second, we returned to flexible inflation targeting and eliminated the "catch-up" strategy. The idea of "intentionally allowing a moderate overshoot of inflation" has proven ineffective. As I publicly acknowledged in 2021, the inflation that emerged just a few months after the 2020 consensus statement was adjusted was neither "intentional" nor "modest."

Well-anchored inflation expectations are crucial to our ability to contain inflation without causing a significant increase in unemployment: they help return inflation to target when adverse shocks push up inflation; and they limit deflationary risks when the economy weakens. Furthermore, they enable monetary policy to support maximum employment during a recession without compromising price stability. The revised statement emphasizes our commitment to taking forceful action to ensure that longer-term inflation expectations remain anchored, which is beneficial to achieving both of our dual mandate objectives. The statement also notes that "price stability is essential to a healthy and stable economy and to the well-being of all Americans"—a view that was fully reflected in the Fed Listens events. The past five years have been a painful reminder of the deep hardships that high inflation can bring, particularly for those least able to afford higher prices for essential goods.

Third, in our 2020 statement, we used the term "shortfalls" rather than "deviations" to describe the gap between employment and full employment. Using "shortfalls" reflects a recognition that our real-time assessment of the natural level of unemployment (and, by extension, full employment) is subject to high uncertainty. In the latter stages of the recovery from the global financial crisis, employment remained persistently above mainstream estimates of its sustainable level, while inflation remained persistently below our 2% objective. In the absence of inflationary pressures, tightening policy based solely on uncertain real-time estimates of the natural level of unemployment may not be necessary.

We maintain this view, but the word "gap" has not always been interpreted in the way we intended, creating communication challenges—in particular, using the term "gap" does not imply a commitment to permanently abandon "precautionary policies" or to ignore labor market tightness. Therefore, we have removed the reference to "gap" from our statement and more precisely stated, "The Committee recognizes that employment may sometimes exceed real-time assessments of full employment without necessarily posing risks to price stability." Of course, if labor market tightness or other factors pose risks to price stability, precautionary policies may still be necessary.

The revised statement also states that full employment is "the highest level of employment that can be maintained over the long term in an environment of price stability." This emphasis on a strong labor market underscores the principle that sustained full employment fosters broad economic opportunity and well-being for all Americans. Feedback from the Fed Listens program also confirms the value of a strong labor market to American families, employers, and communities.

Fourth, consistent with the removal of the "gap" reference, we have revised our statement to clarify our approach to policy when there is a conflict between our employment and inflation objectives: in such situations, we will pursue a balanced approach to advancing our dual objectives. The revised statement is more closely aligned with the original 2012 statement, considering both the extent of deviations from our objectives and potential differences in the time it takes for each objective to return to mission-consistent levels. These principles guide our policy decisions today, just as they did during the 2022-2024 period, when deviations from our 2% inflation objective were our primary concern.

Apart from the above adjustments, the revised statement maintains a high degree of continuity with previous statements: it still explains our understanding of the mission given by Congress and describes the policy framework that we believe is most conducive to promoting maximum employment and price stability; we still believe that monetary policy needs to be forward-looking and take into account the time lag of its impact on the economy, and therefore policy actions depend on the economic outlook and the balance of related risks; we still believe that it is unwise to set a numerical target for employment because the level of full employment cannot be directly measured and will change over time due to factors unrelated to monetary policy.

We continue to view a 2% long-term inflation rate as the level most consistent with the dual mandate—we believe commitment to this goal is key to keeping long-term inflation expectations anchored. Experience has shown that a 2% inflation rate is low enough to ensure that inflation does not affect household and business decisions, while also providing the central bank with some flexibility to implement easing measures during a recession.

Finally, the revised Consensus Statement retains the commitment to conduct a public review approximately every five years. This five-year cycle is not absolute: it allows policymakers to reassess the structural characteristics of the economy and to engage with the public, practitioners, and academics on the effectiveness of the framework, while also aligning with the practices of many global peers.

Conclusion

Finally, I want to thank Chairman Schmid and the entire staff for their hard work each year to put on this outstanding event. Including two virtual appearances during the pandemic, this is my eighth time having the honor of speaking here. Each year, this symposium provides the Federal Reserve leadership with an opportunity to hear from leading economic thinkers and focus on the challenges we face. Over 40 years ago, the Kansas City Fed successfully invited former Fed Chairman Volcker to deliver a symposium in this national park, and I am proud to be part of that tradition.